Claims Can Proceed Against Investors in|Stranger-Originated Life Insurance Scheme

CHICAGO (CN) – A federal judge refused to dismiss claims against investors behind a stranger-originated life insurance scheme based in Chicago.

Stranger-originated life insurance (STOLI) policies are investment arrangements in which a person initiates a life insurance policy on someone else’s life, then resells it to an investor. The investor pays the premiums and collects the proceeds when the insured person dies. The scheme provides opportunities for abuse and the life insurance industry has been considering regulating it for years. According to the court’s synopsis: “Defendants, as promoters for STOLI policies, convinced senior citizens to sign life insurance policies by promising that they would pay them money once the policies were issued. By applying for the insurance policies, however, the senior citizens signed documents creating irrevocable trusts naming defendants as the owners and beneficiaries of the life insurance policies.” Some of the defendants allegedly “attended meetings at churches in the Chicago area to solicit senior citizens … by promising either ‘free insurance’ or payment of money upon issuance of the policies.” They “targeted the senior citizens despite knowing from the beginning that they did not need life insurance, were unable to pay the premiums, and would have no freedom to designate the owners and beneficiaries of the policies,” according to U.S. District Judge Virginia Kendall’s 14-page Opinion and Order. Enter plaintiff Ohio National Life Assurance Corp., which issued the policies. Ohio National claims that defendants “misrepresented to Ohio National material facts upon which Ohio National relied in issuing the policies. [Defendant Mavash Morady] falsely vouched that she knew the senior citizen applicants, that she examined the applicants’ financial records, and that each applicant had a net worth of at least one million dollars. As a result of this deception, Morash received commissions of$118,849.40 from Ohio National. Once they transferred the policies from the trusts to themselves, defendants would turn around and sell them to investors.” Ohio National has sued for damages “and a declaration that the life insurance policies obtained to jump-start the scheme were void at their inception.”Steven Egbert had an interest in one of the nine insurance policies at issue, whose total value was $5.2 million. He sought dismissal; Judge Kendall rejected his motion. Since 2008, Egbert had paid the premiums on a policy signed by 74-year-old Chicago resident Charles Bonaparte, who was solicited at his church with a promise of $40,000 from lead defendant Douglas Davis, one of the scheme’s alleged masterminds. Kendall wrote that “Illinois law has consistently held that if, at the time an individual procures a life insurance policy, that individual has no ‘insurable interest in the life of the insured,’ the policy is void.” Kendall cited a previous ruling that “These wagering contracts are contrary to public policy because they give the insured a ‘sinister counter interest in having the life [of the insured] come to an end.’ Bajwa, 776 N.E.2d at 617 (quoting Grigsby v. Russell, 222 U.S. 149, 154 (1911)).” (Brackets in Kendall’s ruling.) Kendall rejected Egbert’s argument that Bonaparte “was free to pass [his policy] along to Egbert or anyone else as he saw fit.” She wrote that “Bonaparte did not take out the [policy] on his own accord, nor did he exercise unfettered control over it.” Bonaparte testified that “as he understood it, he ‘didn’t apply for the insurance’; instead, he ‘enrolled’ in a program where defendants offered compensation to insure him to ‘receive benefits for themselves.'” Kendall found that Ohio National has provided “ample factual detail” of a scheme intended “to get around the prohibition against wagering contracts.”Illinois typically disallows insurance policies to be contested more than 2 years after they are issued, but “Given Illinois’s unwavering prohibition of wagering contracts, it is no surprise that an incontestability provision cannot stand in the way of the insured seeking to rescind a policy for lacking an insurable interest,” Kendall wrote.